MAKING ECONOMIC DECISIONS

Remember… Scarcity forces people to make decisions about how they will use their resources Economic decision-making requires people to consider all the costs and benefits of a decisions

Economic Decisions Opportunity Cost The most desirable alternative given up as a result of a decision Trade off: all of the alternative choices in a decisions The trade-off is the other things you could have Ex: The opportunity cost of buying a car is now you don’t have that money for college.

Economic Decisions Fixed Costs Costs or expenses that are the same no matter how many units of the good are produced Examples: Mortgage payments, rent

Economic Decisions Variable Costs Costs or expenses that change with the number of products produced These costs increase when production increases and decrease when production decreases Examples: Wages, raw materials, electricity bill, water bill Think: Make fewer cars, your factory is open less, and your electric bill is lower

Economic Decisions Total Costs Fixed Costs + Variable Costs = Total Costs

Economic Decisions Marginal Costs The extra or additional cost of producing one addition unit of a good Example: 30 bike helmets = $ bike helmets = $1550 › marginal cost = $50

Economic Decisions Marginal Revenue The extra revenue that results from selling one additional unit of a good

Economic Decisions Cost-Benefit Analysis Analysis that tells us to choose an action or make a decision when the benefits are greater than the costs

Profit A company ’ s goal is to make as much profit as possible Profit Money a company has made after costs have been deducted Companies increase profit by maximizing efficiency Companies make more profit by adding more land, labor, or capital